What is Latent Defects Insurance?
Latent Defects Insurance (LDI) provides 10-year protection from the completion of construction against major structural defects in residential, commercial, industrial and mixed-use buildings. This coverage may also be referred to as Structural Defects Insurance or Decennial Liability Insurance.
LDI is a first‑resort strict‑liability policy that covers physical loss or damage, up to the full value of the building, arising from defects in the design, materials, or workmanship of or in structural elements. LDI protects stakeholders, including future owners, from costs associated with such defects whether through the legal cost in pursuing the developer or builder, or direct rectification costs.
Who benefits from Latent Defects Insurance?
Financiers, developers, builders, investors and purchasers are all provided protection, as the policy will provide indemnity to all parties for claims. Under a LDI policy, in the event of a claim, insurers will not seek to subrogate against any parties.
What is covered by Latent Defects Insurance?
LDI covers structural and waterproofing defects that were not visible or detected during the construction phase but become apparent post construction.
The policy does not cover cosmetic or non-structural defects.
LDI must be obtained prior to the commencement of construction. The insurer will engage a technical inspection service to carry out inspections at critical stages of the development providing sign off on the completed work. The inspection procoess is intended to provide additional assurance that the development is being constructed in line with approved plans and relevant codes.
What is the process of applying for Latent Defects Insurance?
As stated above, LDI must be arranged before construction begins. Following an initial enquiry, an indicative quotation will be provided, along with a request for key information such as project plans, construction reports, and design documents for the insurer’s review.
The insurer will then engage a technical inspection service (TIC) to review the documentation and engage with the builder and developer to set expectations. This includes identifying key construction “hold points” where physical on-site inspection will take place. These “hold points” may include stages such as before the basement concrete pour and after waterproofing has been applied.
The policy is only issued once construction is complete and the TIS has signed off on the works. This is an important point, as if the builder does not follow the TIS instructions during construction, the policy may not be issued at completion or may be issued with exclusions to cover.
What is the cost of Latent Defects Insurance?
The cost varies by project size, location, complexity, and insurer, but typically ranges from 1.3 to 1.9 per cent of the construction cost. The average cost is around 1.5 per cent.
How are LDI claims paid?
Upon becoming aware of a potential defect in the building, the owner would make a claim directly to the insurer.
Reasonable costs, such as expert assessments and investigation fees, are covered under LDI provided they are directly related to a valid claim and have been authorised by the insurer in advance.
Who should consider LDI Cover?
LDI has the potential to fill a gap in the market where home building warranty insurance does not apply, as most states exclude buildings above three storeys from statutory warranty cover. It offers added peace of mind for owners of new apartments, providing protection against significant claims should a structural defect arise within 10 years of completion.
Builders and developers may also benefit from improved pre-sales where LDI cover is in place as it can improve buyer confidence due to the perception of stronger consumer protection.
State regulations may evolve over time, with the potential for requirements such as defect bonds to be reduced or removed where the builder has procured LDI cover for a development.
